Assume that the following events occurred at a division of Generic Electric for March of the current year.
- Purchased $45 million in direct materials.
- Incurred direct labor costs of $24 million.
- Determined that manufacturing overhead was $40.5 million.
- Transferred 80 percent of the materials purchased to work in process.
- Completed work on 72 percent of the work in process. Costs are assigned equally across all work in process.
- The inventory accounts have no beginning balances. All costs incurred were debited to the appropriate account and credited to Accounts Payable.
Required
Give the amounts for the following items in the Work-in-Process account:
a. Transfers-in (TI).
b. Transfers-out (TO).
c. Ending balance (EB).
The Correct Answer and Explanation is:
Work-in-Process Account Amounts:
a. Transfers-in (TI):
This includes all costs added to the Work-in-Process (WIP) account:
- Direct Materials Used: 80% of $45 million = $36 million
- Direct Labor Incurred: = $24 million
- Manufacturing Overhead: = $40.5 million
Total TI = $36M + $24M + $40.5M = $100.5 million
b. Transfers-out (TO):
Completed 72% of WIP; thus, 72% of the $100.5 million is transferred to Finished Goods:
TO = 72% × $100.5 million = $72.36 million
c. Ending Balance (EB):
Remaining WIP is 28% of the total costs in WIP:
EB = 28% × $100.5 million = $28.14 million
Explanation
The Work-in-Process (WIP) account tracks the costs associated with partially completed products in a manufacturing setting. For this division of Generic Electric, we must determine how much was added to WIP (transfers-in), how much was moved out to Finished Goods (transfers-out), and what remains (ending balance).
Step 1: Transfers-In (TI)
Transfers-in represent all the manufacturing costs added to WIP. The company purchased $45 million in direct materials, of which 80% ($36 million) was used in production. Adding direct labor ($24 million) and manufacturing overhead ($40.5 million), the total amount charged to WIP is $100.5 million.
Step 2: Transfers-Out (TO)
Next, we calculate the portion of WIP that was completed and transferred out. Since 72% of the work in process was completed, we apply this percentage to the total WIP cost.
72% of $100.5 million = $72.36 million.
Step 3: Ending Balance (EB)
The remaining 28% of the WIP represents incomplete products still in the process at the end of the period. Applying this percentage to the total WIP cost:
28% of $100.5 million = $28.14 million.
This exercise demonstrates how cost flows are tracked in manufacturing and how activity levels (like percent complete) affect accounting balances. Accurate tracking of WIP ensures proper financial reporting and operational decision-making.
